2025 Affordability Outlook: It’s Groundhog Day for Home Buyers With a Glimmer of Light
First American Chief Economist Mark Fleming recently released the financial corporation’s affordability outlook for 2025. Some key highlights include:
- National affordability improved on an annual basis in December.
- If mortgage rates ease to 6.5% by the end of the year, income growth trends lower but remains positive, and nominal house price growth moderates, affordability will improve a modest 2 percent by the end of the year.
- Even with a potential 2% improvement by year end, affordability will still be more than 70% lower than in December 2019.
According to the article, Affordability ended 2024 on a positive note, improving 1.2 percent on an annual basis and 0.9 percent on a month-over-month basis. Two factors contributed to the annual improvement in affordability – nominal household income increased 4.0 percent and the average 30-year, fixed mortgage rate decreased by 0.10 percentage points compared with one year ago. Nominal house price appreciation remained stable at 3.8 percent in December. The increase in nominal house prices was not enough to offset the improved affordability from lower mortgage rates and higher household income.
Unfortunately, mortgage rates have drifted higher in January. A resilient labor market, strong economy, and persistent inflation have reduced the Federal Reserve’s urgency to cut rates this year. Combined with heightened fiscal uncertainty, this has pushed the yield on 10-year Treasury notes higher, with mortgage rates following suit. The Fed’s cautious approach to monetary easing has resulted in higher mortgage rate expectations for 2025, which have important implications for affordability.
